1. Field of the Invention
The present invention relates to a data processing system and method for producing company stock price targets using technology indicators. Specifically, a company stock target price is calculated based on a combination of technology indicators.
2. Prior Art
There is a growing awareness that the success of many companies is dependent, not only on the assets on the companies"" balance sheets, but also on the investments that the companies make which do not appear in any financial statements. These intangible investments take many forms, including recruiting and training a highly skilled workforce, promoting brand awareness, and investing in technological innovation.
Investment in technological innovation is imperative for companies in many industries. As technologies develop, companies must innovate in order to keep up with the latest ideas. If they do not, there is a danger that they will be left behind by competitors who are developing more advanced and marketable products. This is especially true in hi-tech industries such as biotechnology, pharmaceuticals and telecommunications.
One way of analyzing a company""s ability to innovate is through evaluation of its patent portfolio. There are a number of quantitative patent citation indicators available that measure the size, growth and quality of patent portfolios. These indicators may be used to identify companies with high quality patent portfolios relative to other companies in the same industry.
The underlying assumption in patent citation analysis is that a patent which is highly cited (i.e., is referred to by many subsequently issued patents) is likely to contain technological advances of particular importance. Studies have shown that patents related to invention awards are cited twice as often as other patents. Similarly, patents designated with Pioneering Patent status are cited much more often than average, as are patents accorded Hall of Fame status by the US Patent Office. Other studies have reported that patents seen as important by a company""s staff were more frequently cited than patents they regarded as less important.
There is also evidence to suggest that patent citations may have some validity as a proxy for the commercial value of patents. One study has shown that patents regarded as commercially valuable by their owners are more highly cited than patents regarded as less valuable. In addition, highly cited patents are more likely to be renewed than patents that receive fewer citations. Given that patent assignees must pay a renewal fee at each renewal point, the decision to renew patents is an economic one. Patent assignees will only renew patents if they expect the commercial returns on those patents to exceed their renewal fee. The finding that highly cited patents are more likely to be renewed therefore suggests that patent assignees expect higher commercial returns from these patents.
A number of studies have also analyzed the relationship between patent indicators and company performance. Studies of seventeen US pharmaceutical companies uncovered a significant positive correlation between patent citation frequency, concentration of company patents in a few patent classes, and company profits and sales. A cross-sectional analysis of mechanical and electrical engineering companies found that by examining the number of patents granted, 12% of the sales growth in the mechanical engineering companies and 14% of new product announcements in the electrical engineering firms could be explained.
The relationship between technology indicators and company valuations has been tested. Findings indicate that patent measures reflecting the volume of companies"" research activity, the impact of companies"" research on subsequent innovations, and the closeness of research and development to basic science, were related to the stock market valuation of companies.
In view of the importance of the above-discussed patent citation analysis in a company""s valuation, a need exists for a system and method which:
(i) employs patent indicators that are normalized to account for differences between patent citation patterns across industries, such that companies in different industries can be compared; and
(ii) produces useful valuations of individual companies using technology indicators.
Despite the obvious attractiveness of using technology indicators in stock market analysis, there are some formidable barriers to using these techniques in stock selection. Perhaps the most important of these barriers is the problem of matching patent assignee names to individual companies. This is because companies patent under many different names, such as divisional and subsidiary names. In addition, large numbers of patents are reassigned from one company to another, for reasons such as mergers and acquisitions. Assignee unification is therefore a useful first step in the application of patent citation analysis.
A computer-implemented process is provided for generating technology-based valuations of companies"" shares. The process includes producing a technology-based market-to-book valuation using the formula:
Technology MTB=a +b1NUMPAT+b2 GROWTH+b3CII+b4SL+b5TCT+b6RandD
where NUMPAT, GROWTH, CII, SL, TCT and RandD are company technology indicators, and a, b1, b2, b3, b4, b5 and b6 are weighting coefficients. Using the formula:
Technology Stock Price=(Technology MTB/Actual MTB)xc3x97Current Stock Price
a target valuation is produced for a company""s stock, based upon the quality of its technology (i.e., based on the technological strengths of companies as measured using patent and RandD indicators). This valuation may be used to identify investment opportunities in the stock market. Specifically, companies whose Technology Stock Price is higher than their Current Stock Price at a particular point may be regarded as undervalued based on their technology, and therefore represent stock purchase opportunities. Conversely, companies whose Technology Stock Price is lower than their Current Stock Price may be regarded as overvalued, and are therefore candidates for selling of the stock.
The Technology Stock Prices can be displayed on summary reports for review by a client or their financial manager. Alternatively, amounts of company stock can be bought or sold from a stock portfolio in accordance with the company valuations. The client referred to here may be a potential or actual investor, a broker, a fund manager, or an automated trading system or the like.